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RBA says unemployment will stay high well into 2015

"There is still a fair degree of spare capacity in the labour market.": Dr Christopher Kent. Photo: Alex Ellinghausen

Australia's unemployment rate is likely to remain relatively high well into 2015, a top central banker said on Monday, helping keep a lid on wages and inflation.

Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent said sluggish wages and rising productivity was also helping regain some of the international competitiveness Australia lost during the peak of its mining boom.

"The demand for labour has improved over recent months, although some of that may reflect a 'catch-up' after a period of weak employment growth last year," said Kent, who heads the central bank's economics department.

"Despite these improvements, there is still a fair degree of spare capacity in the labour market."

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Indeed, Kent predicted employment growth would pick up only gradually over the next couple of years.

"The unemployment rate is expected to remain elevated over that period, declining from later in 2015 when we anticipate GDP growth to be picking up to an above-trend pace," he added.

After touching a decade high of 6 percent in January and February, the unemployment rate has steadied at 5.8 percent for the past three months.

Kent noted the higher jobless rate had led to a sharp slowdown in wage growth, which in turn helped restrain inflation and offset the impact of a lower Australian dollar.

That slack in the labour market is one reason the central bank was content to keep interest rates at a record low of 2.5 percent this month, even after the economy grew at a faster-than-expected 3.5 percent rate in the year to March.

The slowdown in wages combined with a pick up in productivity meant unit labour costs did not rise at all in the year to March, helping Australia regain some competitiveness against its major trading partners, said Kent.

Over the longer term, Kent said the ageing of the population would likely lead to a lack of workers, rather than a shortage of jobs.

"And in that world, one imagines that real wages might grow a little more rapidly than otherwise, in order to encourage participation," he said.